EC104 Economic Reform,1979-2001 Week 8 PDF

Preview

Summary

EC104 Economic Reform: 1979 – 2001 Week 8The AmericasInequality in the United StatesAcemoglu and Autor (2011): ran a regression on the college wage premium based on data found in 2008.- Found that the college wage premium rose for 3 decades, reaching a 98% difference in 2008. - Across 1945-1979, the...

Description

EC104

Economic Reform: 1979 – 2001

Week 8

The Americas Inequality in the United States Acemoglu and Autor (2011): ran a regression on the college wage premium based on data found in 2008. -

-

Found that the college wage premium rose for 3 decades, reaching a 98% difference in 2008. Across 1945-1979, the rise in the share of workers with college degrees has risen. After 1980, real wages have risen for workers with college and post-college degrees but have fallen for lesseducated workers. In 1994-2007 all percentiles experienced growth in real wages. There is a trend of job polarization in the US and the EU. Acemoglu and Autor consider a model where skilled and unskilled workers are substitutes, and exogenous technical change increases the relative productivity of skilled workers. The model cannot explain real earning declines, job polarization, endogenous technical change, or the movement of the middle-skill workers into low wage jobs. Acemoglu and Autor favour “routinization” and denote that the real cost of performing standardized computations fell 60-75% per year across 1980-2006.

Alvaredo et al (2013): look at the trend of income received by the top 1% -

Share of income earned by top 1% rose from 9% in 1976 to 20% in 2011. U-shaped pattern in the US, Australia, Canada, and the UK. The U-shaped pattern does not hold in continental Europe and Japan. Tax Rates: US top income tax rates were above 60% from 1932 to 1981, below 40% in 2011. Across countries, the magnitude of these cuts correlates with the increase in the top 1% share. Pay determination: as top rates fell, high-earner bargain harder for compensation. Capital income and inheritance: Capital income was half of top 1% income in the US across 1916-1932. By 19872010 this was only 1/3. Wealth concentration: greater in the US, where the top 1% owns 35% of all wealth.

Welfare Reform in the US Blank (2002) -

The 1996 Personal Responsibility and Work Opportunity Reconciliation Act replaced the AFDC with the TANF policy measures. The funds allocated to the states were conditional that at least 50% of recipients of welfare were entering work or in preparation to enter work. The minimum wage in the US increased from $3.35 in 1989 to $5.15 in 1997. The Earned Income Tax credit subsidies low wage workers which was only removed well past the poverty line. Federative spending on working families rose by 55.7 billion across 1988-99 while expenditure on non-working families fell by 9 billion. Labour force participation of single mothers with children rose by 10%, 1994-1999. Share of families in poverty fell from 11.9% in 1992, to 8,6% in 2000. The poorest quintile of single mothers experienced declining incomes

Bitler and Hoynes (2010): compare the profiles of welfare recipients before (1995) welfare reform, and during the Great Recession. -

In 1995, families did not tend to mix welfare and work; only 31% of recipients worked in the past week in 1995. In 2009, this had only risen by 3%. Since reform, cash welfare has become less important as a source of income for the poor relative to food stamps, earnings, and social security. This paper consider the 2007-9 asking; have caseloads and family wellbeing become more cyclical since welfare reform? Using food stamps and the “non-cash” part of the social safety yet one might conclude that the answer is yes. Looking at cash welfare, there is no hard evidence to swing either way.

Bertola and Ocampo (2012): look at the tendency to run external deficits due to declining trade balances and increased investment. -

Upward trend in public expenditure and tax revenue was moved from property towards indirect taxes and taxes on wage income, raising budget deficits. Many countries borrowed from newer banks whose interest rates were tied to the LIBOR: this shifted interest-rate risk from banks to borrowers. In 1980, the US Federal reserve raised interest rates to fight inflation. Commodity price falls coinciding with this. This became a debt crisis due to both a deep recession and devaluations in response to foreign exchange shortages. The World Bank and the IMF gifted loans to indebted countries contingent on structural reforms. Reforms included reducing the scale of public sector activity, reducing policies meant to correct trade, near elimination of quantitative restrictions, and foreign exchange controls were removed. Countries were made open to FDI. This was done of achieve efficient allocation of prices in the economy through market forces. Interest rates reflected market forces. Public spending fell by 5% through the 1980s. State-owned enterprises were privatized, and the private sector was deregulated.

Luna and Klein (2014): Looks at the economic crisis in Brazil -

-

The Brazilian Government purchased a loan from the IMF in 1983 but set unattainable inflation and deficit targets. The government decided to devalue the currency by 30% causing GDP and the current account to grow but at the expense of high inflation (200% in 1984). In the 1980s, Brazil ran high trade surpluses, but these were overshadowed by foreign debt interest. In the 1990s, Brazil adopted a liberal stance, opening markets to international competition (reducing import controls), promoting FDI, privatizing state owned enterprises and eliminate state owned monopolies. Didn’t work. In 1994, a new Brazilian currency was introduced with an increase in taxes to balance the budget and reduce inflation. This currency was allowed to appreciate by not depreciate.

Haber et al (2008): Looks at the economic crisis in Mexico -

-

Government deficits were at 14% by 1981 due to an unwillingness to raise taxes or cut spending. The government increased the money supply, forced lending through reserve requirements at the BOM, and foreign borrowing. The result of these policies was the drying up of credit for the private sector, as well as an increased vulnerability to falling oil prices or rising interest rates. In the early 1980s, oil prices fell, and interest rates rose. Peso devalued in 1982 which stopped capital flight but increases the debt-to-GDP ratio. Creditors thus refuse additional loans. The government-imposed exchange controls as well as confiscating US-dollar denominated deposits. In august 1982 Mexico defaulted on debt and banks were nationalized in September causing Real GDP and investment to fall.

Inequality in Latin America -

Latin America is the most unequal region in the world.

Szekely and Montes (2006): Look at inequality in Latin America -

From 1960s onwards, extreme, and moderate poverty both fell, with inequality declining until the early 1980s. Extreme poverty declined from 94 million people to 36 million people across 1970-80. Inequality rose through the 1980s and barely improved in the 1990s despite renewed growth.

Explanation for inequality -

-

Income earning assets are unequally distributed. For 1960 birth cohorts, 73% of individuals had at least primary education, and 54% at least secondary. Land ownership is extremely unequal with a land Gini coefficient of 0.80.9 in the 1960s. Households will fewer assets have fewer opportunities to generate income. FLFP tends to vary with schooling rates. In Honduras, women with no schooling had a 32% participation rate in 1999, but those with a higher education had a participation rate of 73%.

-

Asset Returns are lower per unit for those with fewer assets. In 1997, those who had completed secondary education earned 95% higher than those with no schooling. For those who completed higher education, this was 152%.

-

Real interest rates have generally been high and positive, in the 1990s it was in excess of 10%

Szekely and Montes (2006): Contrast Latin America with South Korea and Taiwan. -

Cohorts born in 1940 achieved similar levels of schooling in Latin America and Taiwan. Cohorts born in 1970 achieved 50% more schooling in Taiwan. Schooling increased by one year per decade in Latin America for these cohorts. The difference in average education for individuals in the highest income decile and the lowest income decile in Latin America was about 7 years in 1999.

Africa

The African Growth Tragedy African economies shrank in this period. In the early 1990s, they shrank at almost 2% per annum. Collier & Gunning (1999) - In the 1980s, African Economies shrank 1.3% per year. This paper examines potential causes of such decline. - Domestic Destiny 1) Africa’s tropical geography leads to disease transition and hostile conditions for livestock and agriculture. Life expectancy has been low, fertility high. 2) Africa has poor soils, a semi-arid climate, and unpredictable rainfall. 3) Colonial rule left Africa with many small countries, which raises fixed costs of governance and shrinks markets. - Domestic Policy 1) Governments were undemocratic, captured by educated urban elites. 2) Public employment was expanded. Public workers were poorly paid and not selectively recruited. - Exports concentrated in a small number of primary commodities with volatile prices. This discourages investment and price declines occurred following the 1960s. - Dependency on Foreign Aid 1) If a country becomes controversial on foreign aid, the government might become focused upon what the benefactor wants. - Anti-export governments that tax exports as a source of revenue. - Regulations restricted production. E.g., new manufacturing firms in Kenya required permission from incumbents to enter. - Urban bias led to the taxation of agriculture and the neglect of agricultural research. Easterly (2009) -

The paper examines Africa’s growth failures in the 1980s, and the 1990s investigating that despite structural adjustment, Africa failed to pursue the East Asian growth path. Structural adjustment was unsuccessful at changing economic policies due to the uncredible threat of withholding future loans. Over the 1980s and 1990s there was a general trend of policy improvement independent of structural adjustment.

Economics of African Conflict Blattman and Miguel (2010) -

Definition of civil war from political science is that civil wars have at least 1,000 battle deaths in a year. One third of all countries a civil war across 1960-2010. 20% experienced at least ten years of civil war.

Miguel (2009) -

30% of countries in sub-Saharan Africa experienced a civil war or civil conflict in the 1990s.

Miguel et al (2004) -

Runs a regression examining whether there is an opportunity cost to violence and that droughts increase the returns to violence relative to farming. The regression is within country, they examine whether if a country has a lower level of rainfall relative to its mean, is that country more or less likely to have a civil war or conflict. Argue that rainfall increase economics growth, estimative that if economic growth increased by 5%, the probability of conflict in the following year falls by half.

Dal Bo (2011) -

Looks at how labor-intensive goods and capital-intensive goods individually decrease and increase the opportunity cost of conflict.

Berman et al (2017) -

Use a fixed effects regression showing that rising mineral prices increase violence in grid cells close to mines.

Colombia, Dube and Vargas (2013) -

Use a fixed effects regression for municipalities that produce coffee and oil. When coffee prices rise, violence falls in coffee-producing municipalities. When oil prices rise, violence increases in oil-producing municipalities.

Botswana: An African Success Story Acemoglu, Johnson, and Robinson -

Argue that institutions are the most important drivers of economic development

Look at Slide 28 for a Definition of Institutions by Douglass North Botswana’s Economic Success -

Across 1965-1998, GDPpc grew at 7.7% per annum, the highest in the world 12km of paved roads and 100 secondary school graduates in 1966.

AJR (2003) -

Argue that the success of Botswana can be determined as the result of policies that were sustained through institutions of private property. Diamond wealth reduced incentives to challenge social norms Minimal effects of colonialism on these institutions The elite benefitted from sustaining these institutions on independence....